Honeymoon over for John Fletcher

John Fletcher's honeymoon as Coles Myer chief executive ended abruptly yesterday when, just over a month after he reaffirmed forecasts of a $400 million profit this year, he was forced to announce a major downward revision.

The billion dollars of sharemarket value added when Fletcher was appointed disappeared in an instant after he disclosed Coles now expects to earn between $350 million and $365 million this year. Shares fell a gut-wrenching 16.6 per cent.

Perhaps the market movements in both directions were overdone, but they highlight the fact that the market had capitalised Fletcher's personal credibility. Yesterday's admission represented one of the few times in a stellar career that he has failed to deliver. Neither he nor the company can afford any more surprises on the downside.

In the broader scheme of things the revision of earnings isn't all that important, given that the Fletcher game plan for Coles is a five-year program. He has retained his target of an $800 million profit in 2006.

It is disconcerting, however, that Coles has stumbled yet again so early in the program. The latest in a long line of disappointments provides ammunition for those who believe there are structural reasons for the perennially poor results from Coles's non-food businesses. ");document.write("

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Fletcher isn't the first star CEO to suffer a setback. The market backed Peter Smedley at Mayne and Keith Lambert at Southcorp to replicate previous successes and has savaged their companies' share prices after unexpected profit warnings.

Interestingly, another of the CEOs brought in to turn around a faltering business, Orica's Malcolm Broomhead, was able to announce a better-than-expected interim result yesterday and flag a substantially better-than-expected result for the full year.

Broomhead, in saying that he is comfortable with an expectation of a $210 million profit for this year - compared with previous market forecasts of a $180 million profit - has created the same pressure to deliver that has brought Fletcher momentarily undone. At least Orica has a portfolio of mainly industrial businesses and is therefore less exposed to the vagaries of consumer behaviour.

While it could be said the trashing of the Coles share price yesterday flows from the false confidence Fletcher had in his group's ability to execute its retail strategies, CEOs have been placed in an invidious position by the ASX's interpretation of its disclosure rules.

With companies obliged to respond to market expectations and any discrepancy between those expectations and their company's understanding of its reality, CEOs are set up to fail.

They have effectively been forced to put their own forecasts into the market to avoid having to respond on a daily basis to the more extreme analysts' forecasts. If they fail to deliver, their credibility is damaged.

For the high-profile CEOs embarking on turnarounds, the stakes and the risk of failing to meet market expectations of a smooth and shock-free recovery are high.

Coles, like Mayne Group and Southcorp, was priced for perfection. Any stumble or uncertainty triggers a market meltdown.

It is far too early to tell whether Fletcher's basic game plan of stripping out Coles' costs and reinvesting the savings in lower prices to improve competitiveness and drive turnover - and eventually margins - is flawed.

While costs are dropping out, a better understanding of Fletcher's ability to deliver the $300 million of cost reductions identified will come closer to the first checkpoint in the five-year plan, the 2004 financial year.

In fact, the broader picture he revealed yesterday is reasonably encouraging - or would be if the company hadn't over-promised - with sales rising a solid 8.8 per cent for the first nine months of the year and sales growth accelerating as the year progresses.

But within the two businesses that disappointed, Kmart and Myer Grace, sales growth wasn't as strong as the group expected and resulted in lower margins as Coles tried to maintain sales "momentum" and avoid its recurrent problem of ending the year with mountains of unsold stock.

The explanations for the latest setbacks in the general merchandise and apparel divisions range from external factors - a mild autumn and therefore sluggish sales of the group's winter range - to customer dislocation and confusion as the group alters its retail strategies.

At least Coles appears confident that it won't be left with the kind of inventory problems that have bedevilled it in recent years and carried the legacy of one year's problems into the next.

Making it even more difficult to assess Coles's performance, it is still assembling and bedding down its key retail management team.

A new Myer Grace managing director, a US retailer, Dawn Robertson, was announced only last week. Fletcher is still searching for a new chief financial officer.